Portugal Downgraded as Banks Reported to Shun Bonds

Portugal's credit rating was downgraded again on Tuesday and the country's biggest banks reportedly threatened to stop buying government debt, urging the caretaker administration to seek a short-term loan during pre-election limbo.

Business daily Jornal de Negocios reported that the heads of the country's biggest banks met with the governor of the Bank of Portugal on Monday, telling him that the country should secure short-term financing to soothe concerns until a June 5 general election.

Moody's cut Portugal's sovereign debt by one notch, saying it believed a new government would need to seek financing support from the European Union as a matter of urgency.

Standard & Poor's and Fitch have already downgraded the country since the minority Socialist government resigned last month after parliament rejected an austerity package.

The events have raised pressure on Lisbon, which has struggled for months to shake off expectations that it will have to follow Greece and Ireland in seeking a bailout.

A spokesman at the central bank would not comment on the Jornal story, which reported that Portuguese banks were no longer in a position to buy government debt after purchasing large quantities of bonds in the past year.

A spokesman from Millennium bcp would not comment on whether the bank had decided not to buy further government debt. Nor would a spokesman from Banco Espirito Santo comment.

But Carlos Santos Ferreira, head of Millennium bcp, Portugal's biggest private bank, said in a television interview late on Monday that it was "indispensable that the country seeks a short-term loan," of at least 10 billion euros.

A short-term loan has been mooted by Portugal's opposition Social Democrats. The party's leader, Pedro Passos Coelho, suggested it in a Reuters interview last month.

Such a loan, from the International Monetary Fund or European Union, could soothe concerns around two big bond redemptions the country faces in April and June, which total about 9 billion euros.

It would be separate to any eventual bailout, which economists say is virtually inevitable.

The euro slipped from a five-month high versus the dollar, knocked by the Moody's downgrade. The cost of insuring Portuguese debt against default rose and 10-year Portuguese bond yields headed towards nine percent.

Portuguese bond yields have shot higher since the resignation of the government two years before its term ends and yields are scaling new euro-era highs virtually on a daily basis.

"The government's current cost of funding is nearing a level that is unsustainable, even in the short-term," Moody's said in a statement.

The country held an extraordinary auction of one year bonds on Friday, when it raised 1.6 billion euros. It will auction up to one billion euros of 6- and 12-month Treasury bills on Wednesday.

"GAME OVER"

Jornal de Negocios ran a separate column on Tuesday titled "Game over, we have lost, Mr. Engineer," referring to Prime Minister Jose Socrates who has insisted the country needs no outside help.

Socrates vowed on Monday to keep resisting a foreign financial rescue for the debt-laden country, including the short-term loan suggested by the opposition.

Asked if a loan from the IMF was possible if the country faced immediate financing problems, Socrates told RTP television: "I don't know of any IMF financing line that would not enforce a program with conditions.

"All programs that have been negotiated so far were very severe in terms of measures demanded from a country," he said.

A euro zone source told Reuters on Monday that finance ministers will discuss on Friday Portugal's options under an interim government, including whether it is capable of requesting EU financial aid.

Concerns over Portugal's ability to finance itself have spiraled as the caretaker Socialist government, which is in place until elections on June 5, has said it does not have the power to request a bailout.

Portugal's credit rating was downgraded again on Tuesday and the country's biggest banks reportedly threatened to stop buying government debt, urging the caretaker administration to seek a short-term loan during pre-election limbo.
Business daily Jornal de Negocios...